Below are trade themes and trades I currently like (trades are rated from one to three *s):

  1. Own Cheap Crisis protection
    *** Buy FFJ9 @ 97.595 (or FFK9 @ 97.60).  March is definitely too early for a hike.  May could be close, but as long as there is no inflation, there is no reason for the Fed to do an early hike.
  2. Play for eases to be removed from the curve
    *** Buy GE0J9 97.25-97.375-97.50 put fly @ 2.5.  You can also do this trade in K and/or M for fractionally less, if it fits your risk/reward view better.  If all eases are removed from the curve, you would expect EDM0 to be around the 97.375 strike.  You can also profit if eases remain but Libor-FF is priced to widen.
    * Buy FFJ9-N9 spread @ -2 (or -1.5).  This is picking up pennies in front of a steamroller, but if you have other bullish trades, this makes sense.  For example, if you sold the EDH9 straddles vs EDJ9 straddles.
    * Buy EDH0-U0 vs Sell FX weighted BAM0-Z0 spread @ -13.  The premise of this trade would be to that if the US were to ease, Canada would soon follow.  In the meantime, the structure rolls favorably.
  3. Play for eases on the curve to be pushed back (aka play for rolldown).
    * Sell EDH1 1yr double fly @ -3 (or -3.5).  This only rolls down 2+bps, but if you think we have a recession after the next Presidential election, this is located well.  Alternatively you can just sell the EDH1 1yr single fly.  This could also eventually work well if the Fed is on hold after the eases (or there is QE).
    * Sell EDU0-U1 spread @ -1.5 (you can also consider selling EDM0-M1).  You may want some steepening protection further out the curve.  A very limited-risk trade would be to sell EDU0-U1 vs buy EDZ0-Z1. It is hard to see this condor structure getting positive (as the flies would have to go positive), in most realistic scenarios.
  4. Play for a 2019 hike.  Considering net eases are priced into the curve, you can just sell an appropriate ED or FF contract.  You can also consider buying put structures or buy a year fly starting in the whites.
    *** Buy GE0M9 97.375 put vs Sell GE2M0 97.375 put @ 0.5.  (you can also do in J or K, depending on your timing view).  You need to think that the markets will continue to price in eases behind.  This structure is a good complement to your book if you are biased towards a steepener.
    * Buy FFN9 3mo fly @ 0.5.  This will work on a Q3 hike, but caution needs to be taken if it looks like a Q3 ease or Q4 hike could materialize.
  5. Own the year-end turn.  Make sure your book is net short EDZs further out the curve.  You can buy or sell an appropriate 6mo double fly to do this – for example selling the EDZ1 6mo double fly.
  6. Libor-FF value
    *** Buy EDU9-H0 spread vs Sell FFV9-J0 spread @ 0.5.  Considering Libor-FF is pricing in for narrowing close to last year’s narrows, playing for cheap year-end widening makes sense.


[updated February 28, 2019]